Thursday, October 21, 2010


In his last entry in our “series”, SUPPLY, DEMAND, Joe uses economic theory to explain why regulation will make the cost of tax preparation rise.

If the supply of something goes down without a corresponding reduction in demand, prices go up. That is the way of the world.”

While it has been over 3 decades since I took Economics 101, Joe is perfectly correct. But he assumes a significant reduction in the supply of tax preparers.

I do not see tons of currently unenrolled tax preparers who make a living preparing 1040s suddenly going out of business because they have to spend an additional $64.25 per year, and add perhaps an hour or two at most to their annual workload, to register with the IRS! This is all we are talking about - as I have said time and again serious “professional” tax preparers should already be taking at least 15 hours of CPE in federal taxation per year.

In a comment to my “I Wish They Would Explain” post, and at his blog TICK MARKS, (the blog has nothing to do with lyme disease - sorry I couldn't resist) Dan Meyer says -

Some realistic examples of people who will be hurt by the TPIN: women with tax skills and more than one preschooler who might prefer to stay home and prepare a dozen or three tax returns for fun money and retirees who may want to do a few dozen tax returns to supplement Social Security. For those preparing a small number of returns, the fees and paperwork is a significantly greater aggravation than it is for tax preparers (whether EAs, CPAs or previously unregistered) who prepare hundreds of tax returns per year--and the ‘small-timers’ may still be keeping up with CPE and changes in tax law.”

As I have said before, I can see how the additional costs may force some of the more casual preparers “out of business”. But I have also said that this may not be a bad thing. The more “casual” the preparer the less competent he/she will be, and the greater the likelihood of incorrect returns. Would you go to a “casual” doctor or lawyer or any other kind of professional. To use the example brought up by a member of the IRS advisory panel – would you even go to a “casual” barber for a haircut.

However, the cost of 15 hours of CPE, where any real additional cost lies, is not prohibitive. The National Association of Tax Professionals provides a 2-day offering at various convenient locations throughout the 50 states each year-end consisting of “The Essential 1040” on day one and “Beyond the 1040” on day two. This provides 16 hours of CPE, including the required update and ethics coverage, for $349.00 for members and $433.00 for non-members (clearly it pays to become a member – for a variety of reasons). If the “casual” preparer is already keeping up to date via some CPE another day is not that expensive.

If these casual preparers are not already taking any CPE the additional annual cost, including the registration fee, would be about $500.00 – causing the “casual” preparer to add $14.00 to $21.00 to what is probably a lower-end fee (they have virtually no other overhead) to begin with.

I have also suggested that perhaps the new licensure will cause them to become less “casual” and look for more clients as long as they have to incur the expense. And as 1040 preparation will now be a “recognized” profession more individuals may decide to join the ranks.

If regulation causes the “pool” of tax preparers to be reduced by a few hundred, or even 1000, “casual” preparers out of about 1 Million total that is certainly no great reduction of supply.

Along these lines there is also talk of losing “seasonal” preparers. Hey, I am basically a “seasonal” preparer. 1040 preparation is a “seasonal” business. But I work at least 12 hours a day 7 days a week during the “tax season” (mine is defined as 2/1 – 4/14). While there are GDEs and IRS and state correspondence to deal with during the rest of the year, the time involved is minimal compared to the actual “season”.

While I have argued, I believe successfully, that the added costs of the regulation regime, even if passed along to clients, are not sufficient to materially increase the cost of preparing tax returns, I do see why Joe says that a new “licensed profession” – specifically new initials (RTRP) after one’s name – will “allow” the newly enrolled to charge higher prices.

I have always said that having initials after one’s name, as with a CPA, can cause one to charge “twice as much for half the service”. However, I feel that this applies more when there is an “uninitialled” alternative. CPAs, and perhaps EAs, charged more to prepare a tax return than an “unenrolled” preparer because they had initials and the unenrolled did not. Under the new regime ALL tax return preparers will have initials. Eventually only RTRPs, EAs, CPAs, amd JDs will be allowed to prepare tax returns for a fee.

I still do believe that the majority of previously unenrolled preparers, like myself, are fair and ethical and will not, or only slightly, raise fees in response to regulation. To be honest, regulation will actually cut marketing costs for the previously unenrolled by reducing the need for these preparers to advertise aggressively – as the promised IRS publicity campaign regarding the new regime will provide a great deal of “free advertising” to newly endowed RTRPs.

Even if newly enrolled preparers slightly increase their fees to reflect their new status, I do believe that the fact that these preparers are now “recognized” as being knowledgeable, experienced, and current in 1040 preparation will dispel the “urban tax myth” that CPAs are tax experts and actually cause certified ones to reduce their fees for 1040 preparation to remain competitive.

My largest business/1040 client has a substantial interest in a manufacturing company in California. He uses a CA-based CPA firm for the corporate work and to prepare his California state personal income tax return (to which I have no objection – one less state to have to learn and keep current on). The CPA at the firm with whom he deals has told him that they charge lower fees for 1040 preparation than they charge for corporate tax and other accounting work, because of the “market”. In order to compete successfully with EAs and unenrolled preparers like me, who have a much more reasonable and appropriate fee structure, they have to charge less than they would like.

Joe also mentions that the previously unenrolled preparers will “eventually be losers to the benefit of the nationwide franchised preparation outfits”. Henry and Richard and their ilk have been vocal supporters of the new regulation regime. And, coincidentally or not, one of the two top level IRS persons initially put in charge of the review of regulation was a former H+R Block CEO.

{As an aside – I can’t for the life of me understand why the IRS would want to hire anyone from Henry and Richard, or a similar fast food chain, in a high-level position, especially Mark Ernst. FYI, as reported by WebCPA, Ernst, currently the IRS Deputy Commissioner for Operations Support, was “chief operating officer of H+R Block between 1998 and 2000. He was named CEO of Block in January 2001 and became chairman the following year. In November 2007 he was ousted by hedge fund manager and former SEC Chairman Richard Breeden, now chairman of the company, who criticized Block for moving away from its core tax preparation business into areas such as subprime mortgages". So he was a contributing factor to the mucking fess that our economy became, and is still feeling the effects of. And, I also can’t understand why a former corporate CEO would reduce his lifestyle so as to be able to live within the context of the salary of a government employee, however high on the GS level the position might be.}

H+R, et al are already overpriced, considering the quality and quantity of services provided. I have no doubt that these guys will raise fees to take advantage of the new initials that will appear after their casual/seasonal employees names. They may have to, because I expect that once they become “initialed” Henry and Richard will have to pay their employees more. As I have posted several times before, I do believe that the smallest component of H+R Block’s expenses is the cost of the actual tax preparer employee.

I do hope that regulation will cause potential victims of the fast-food tax preparation chains (fast food service for gourmet restaurant prices) to shop around and discover that they will get a better “bang for their buck” by using an independent RTRP. I can think of no reason why any taxpayer should use the services of H+R or their ilk, either in the past or under the new regulations.

As with just about anything, there are pros and cons to the regulation of tax return preparers. Joe Kristan has done a good job of outlining the potential disadvantages of the regime. However, I hope that I have shown that the disadvantages are truly few and that they are greatly overshadowed by the advantages.

And that’s all I have to say on the subject!

I look forward to Joe’s final words – as well as the words of other tax preparers and bloggers and of taxpayers.


No comments: